DBRS Ratings of Old National Unchanged After 1Q13 Results – Senior at BBB (high); Trend Stable

DBRS, Inc. (DBRS) has today commented that its ratings for Old National Bancorp (Old National or the Company), including its BBB (high) Issuer & Senior Debt rating, are unchanged following the release of 1Q13 results. The trend on all ratings is Stable. Old National reported 1Q13 net income of $23.9 million, up from $23.0 million for 4Q12. Improved QoQ earnings were mostly driven by lower expenses and credit costs. Specifically, higher earnings reflected a 9.2% decrease in non-interest expense and a 63.6% decrease in provisions for loan loss reserves, partially offset by a 7.5% decrease in total revenues.

Despite the difficult operating environment, the Company’s balance sheet fundamentals remain sound. Indeed, although still pressured, Old National reported sustained asset quality improvement, reflecting lower levels of non-performing assets (NPAs) and still low levels of net charge-offs (NCOs). Furthermore, Old National’s capital position remains solid, and provides for solid loss absorption capacity, and for growth, either through organic means or acquisitions. Nonetheless, the slow growth and low interest rate environment continue to pressure revenues.

Linked-quarter results were somewhat noisy and included several non-core items. During 1Q13, the Company reported a $2.4 million gain on the sale of nine banking centers, $1.7 million of BSA/AML project expense, $1 million in securities gains, $0.7 million of debt extinguishment charges, and $0.6 million of branch optimization expense. During 4Q12, Old National reported $4.2 million in securities gains, $2.0 million of integration expense, $2.6 million of branch optimization expense, $1.9 million of debt extinguishment expense and a $1.0 million contribution to the ONB Foundation. Excluding these non-core items, income before provisions and taxes would have declined approximately $4.9 million, sequentially.

Driving improved 1Q13 earnings, on a linked-quarter basis, was the Company’s fairly broad based reduction in expenses. Excluding the before mentioned non-core items, Old National’s DBRS adjusted non-interest expense declined 5.1%, mostly reflecting an 81.5% decrease in OREO expense, and a 60.0% decrease in marketing expense. DBRS notes that expense reduction remains a focus of the Company, as it heads towards its efficiency ratio goal of 65% for the year. For 1Q13, the Company calculated efficiency ratio was 68.3%, down from 72.1% for 4Q12.

Overall, the sequential decrease in total revenues reflected a $5.0 million, or a 9.7%, decrease in non-interest income and a $5.4 million, or 6.4%, decrease in net interest income. Excluding gains on branch sales and securities, the Company’s non-interest income declined by $4.2 million, or 8.9%, mostly reflecting a $3.0 million negative swing in change in indemnification asset and a $1.8 million, or 14%, decrease in deposit service charge, driven by lower overdraft fees. Meanwhile, the decrease in spread income was driven by a 30 bps narrowing of net interest margin (NIM: FTE basis) to 4.04%, partially offset by a 1.4% increase in average earning assets. Excluding the accretion related to its three recent acquisitions, the Company’s core NIM narrowed 9 bps to 3.31%, reflecting lower loan yields and a higher investment portfolio balance, driven by the anticipated close of the acquisition of Bank of America deposits later in the year. Going forward, management anticipates continued pressure on the NIM.

Driving the linked-quarter increase in average earning assets was a $203.1 million, or 7.2%, increase in investment securities, somewhat offset by an $81.3 million, or 1.6%, decrease in loans. Lower sequential average loans were mostly attributable to a 17.5% decline in covered loans and a 2.2% decrease in commercial & agricultural real estate loans. DBRS notes that the covered loans continue to be managed down.

Although still pressured, Old National’s asset quality improved during 1Q13. Specifically, NPAs (excluding covered assets and residential loans and leases held for sale), decreased $6.3 million QoQ to $165.5 million, yet still represented a relatively high 3.46% of loans at March 31, 2013, down from 3.56% at December 31, 2012. Meanwhile, NCOs remain minimal at 0.10% of average loans, for 1Q13. Finally, although adequate in light of consistently low loss rates and the fair valuing of acquired portfolios, Old National’s loan loss reserves represented a low 31% of nonperforming loans at quarter end.

Old National’s funding and capital profile remains strong. The Company’s deposit base comfortably funds the entire loan portfolio, as evidenced by its loan to deposit ratio of 72.3%. Moreover, $3.3 billion of mostly good-quality securities bolsters liquidity. Nonetheless, there is extension risk in the portfolio, which DBRS will continue to monitor.

DBRS notes that future deposits will be augmented by the recently announced pending acquisition to purchase 24 branches and $778 million in deposits from Bank of America Corporation. With respect to capital, at March 31, 2013, Old National’s tangible common equity ratio was a high 8.96% and its estimated Tier 1 capital ratio was 14.1%.

Notes:
All figures are in U.S. dollars unless otherwise noted.

[Amended on June 25, 2014 to remove unnecessary disclosures.]